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China-driven market glut could 'counteract' US solar tariffs

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China-driven market glut could 'counteract' US solar tariffs

SNL Image

An array of solar panels in northwestern China's Ningxia Hui autonomous region.
Source: Associated Press

China's decision to dial back demand from its domestic solar market is challenging hopes for a manufacturing renaissance in the U.S. as companies again face the prospect of a raw material and equipment glut that could drive a steep decline in prices.

President Donald Trump in January approved tariffs on most imported solar cells and panels in an attempt to shield domestic manufacturers from foreign competition and reclaim jobs lost to Japan, Europe and then China over nearly two decades. Several companies responded with plans to open factories in America. However, Beijing's efforts to slow construction in the world's biggest solar market could offset U.S. duties by lowering international solar panel prices and increasing American imports, according to IHS Markit, a research firm.

"I think the risk of ... bringing manufacturing to the U.S. has always been very clear," said Edurne Zoco, head of solar research at IHS Markit, noting that the latest U.S. tariffs are only scheduled to be in effect for four years. "With the new pricing environment we will be facing in the next quarters there is not really an economic need to bring manufacturing [into] the U.S."

IHS Markit cut its forecast for 2018 solar installations in China by 28% and lowered its global forecast 7%. Bloomberg New Energy Finance, which also expects a sharp drop in solar installations in China, said panel prices will likely fall about 35% this year.

Manufacturing overcapacity and relentless pricing pressure have been perennial issues in the solar industry and factored into the latest round of U.S. tariffs.

"Man announces and God laughs," said Paula Mints, chief analyst at SPV Market Research.

After China cut a solar incentive in 2016, global panel prices tumbled nearly 38%, according to GTM Research figures. In 2017, China's JinkoSolar Holding Co. Ltd. and South Korean manufacturer Hanwha Q CELLS Co. Ltd., both of which have announced plans to open U.S. plants, saw the average selling price of their solar modules fall 21% and 28%, respectively, according to securities filings.

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JinkoSolar CEO Kangping Chen, second from left, in New York following the company's IPO in 2010.
Source: Associated Press

Before China announced its new solar policies, analysts said any manufacturing bump the U.S. got from tariffs would likely be limited by a 2,500-MW annual cap on solar cells that can be imported duty-free to be assembled into panels. In February, Credit Suisse identified 4,450 MW of demand for duty-free cells in 2019, far in excess of the quota.

Even with the heightened risks, Ontario-based Silfab Solar Inc. on June 7 said it is "exploring U.S. manufacturing opportunities and locations." Silfab, which was part of a group of Canadian companies that sued the U.S. government over the latest solar tariffs, made the statement in a news release announcing a panel supply contract with California-headquartered PetersenDean Roofing & Solar.

"There are many moving parts that will impact our ultimate decision," said Geoff Atkins, head of business development, sales and marketing at Silfab Solar.

JinkoSolar, which announced its U.S. plans a week after Trump set import tariffs, is building a plant in Florida "in conjunction with" a large panel-supply agreement with NextEra Energy Inc., an electric utility headquartered in the state, according to a securities filing. JinkoSolar later announced another big contract with sPower, a joint venture between AES Corp. and Alberta Investment Management Corp. Those contracts should provide JinkoSolar "some assurances" of demand amid the new market uncertainty, Credit Suisse equity analyst Maheep Mandloi said.

When an affiliate of Hanwha Q CELLS announced plans to build a panel factory in Georgia, it did not identify an ultimate buyer. The output will supply Hanwha Q CELLS, which generated 40.5% of its net revenues in the U.S. in 2017. The company's top customers in 2017 included JinkoSolar and subsidiaries of NextEra Energy.

Zoco said IHS Markit is still evaluating the seriousness of Hanwha Q CELLS' plan. With "the current new environment ... we need to further investigate. It's true that in the past so many of these just remain an announcement."

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Pallets of SunPower solar panels in a warehouse in 2016.
Source: Associated Press

Asia price advantage

Since California-based SunPower Corp. announced its plan to build up a U.S. manufacturing presence by acquiring Oregon-based SolarWorld Americas Inc., SunPower Chairman and CEO Tom Werner has made it clear the decision was motivated by the U.S. tariffs. Those import taxes were requested by SolarWorld Americas and Suniva Inc., another U.S.-based manufacturer, because the companies said they could not compete with foreign rivals.

"If Suniva and SolarWorld are to compete in the long term, they need to be able to play on an international field without a tariff and without a quota," Ed Fenster, executive chairman of rooftop solar developer Sunrun Inc., told U.S. trade officials in 2017. "And so the question is, how do you get them to that point?"

JinkoSolar has said it is about 10% more expensive to make solar panels in the U.S. than in Asia, and without tariffs, there is no economic case to manufacture in America, Mandloi said.

However, companies may be weighing other factors.

"Longer term, some of these companies feel there's a premium for U.S.-made products even when the tariffs go away," Mandloi said.

Additionally, changes that Congress made to the U.S. tax code helped improve the "economic rationale" to manufacture in America, First Solar Inc. CEO Mark Widmar has said. The Arizona-based manufacturer, whose thin-film panels are not subject to the latest American tariffs, is building a factory in Ohio. Analysts said the company's 10,600 MW of contracted module shipments should help insulate it from market swings over the next few years.

"First Solar continues to have confidence in our pipeline, and we are proceeding with our stated plan to increase manufacturing in the U.S.," First Solar spokesman Steve Krum said.

JinkoSolar, Hanwha Q CELLS and SunPower did not respond to requests for comment.